Friday, January 10, 2014

Every now and then there are jobs reports that are way out of line with other data, and the December 2013 report released today is very likely one of them. Bad weather was almost certainly a factor, and faulty seasonal adjustment factors could be another. Whatever the case, the jobs numbers are notoriously subject to significant revisions way after the fact, so when faced with a one-month outlier like this one, it's best to ignore it.

It's ironic that the ADP report for December was stronger than expected, while the BLS report today was much weaker than expected (+74K vs. +197K). As I read the chart above, whenever the two reports diverge meaningfully in one month they almost always come back into line the following month. And as the chart also shows, the BLS jobs number can be very volatile from month to month, and December's number was actually less volatile than many others we saw back in the mid-2000s when the economy was doing just fine.

Even though the unemployment rate has fallen much faster than expected in the past year—tumbling 0.3% in December—the decline has been driven mostly by increasing numbers of people deciding to "drop out" of the labor force, rather than by an increasing pace of hiring.

Over the past five years, the labor force has grown only 0.2%. This is unprecedented: throughout history, the U.S. labor force has typically grown by about 1% a year. As the above chart suggests, there are roughly 10 million people "missing" from the labor force. If they were to decide to look for a job, the unemployment rate would be much higher—possibly as high as 11-12%.

A one-month surprise such as we saw today hardly registers if you look at the big picture in the chart above. Jobs continue to expand, and we are only months away from seeing total employment reach a new all-time high.

As I've noted before, the much-ballyhooed growth in part-time jobs is a myth. As the chart above shows, part-time employment (the number of people working 35 hours or less per week) has not changed at all since the recovery began in mid-2009. As a percent of total employment, part-time jobs have fallen significantly during the current recovery, just as they have in prior recoveries. Part-time employment remains relatively high however, and that likely reflects the new regulatory burdens (e.g., Obamacare) that have been piled on businesses in the past 4-5 years.

Two enduring questions about the jobs market remain in force: why have so many dropped out of the labor force, and why haven't businesses expanded faster? The FOMC is delusional if it thinks that interest rates or the supply of bank reserves are the answers to those questions. If policymakers want to pump up the job market they are going to have to look for different incentives: e.g., ones that increase the after-tax return to working and investing, and ones that reduce the regulatory hurdles to new business formation. I continue to believe that we are in a slow-growth recovery mainly because of the headwinds emanating from Washington.

Government is the only force that can stop human ingenuity. This is apparent throughout the world and history (unfortunately).

Ironic that the current administration hampers business with populist regulations and restrictions, yet Obama's low skill constituents are hurt as companies push automation and efficiency, by way of high skill employees.

As employment lags and the economy grows, the relation to increased productivity is certain.

Do you have some charts related to productivity and lack of job growth, and also low skill vs high skill job growth (or lack of)?

I think the bond market was expecting to see a jobs number consistent with further growth acceleration. Instead it looks like a continuation of 2-3% growth. Confirms my suspicion that the market has become too worried about rate hikes. We aren't likely to see a much stronger economy until fiscal policy improves.

I agree with improving the supply side at all times. And check out 12 million Americans receiving monthly disability checks from the VA and SSDI. This dwarfs unemployment rolls and is long-term!That said, aggregate demand is weak, Iinflation at historic lows.The Fed should do more, not less. The right-wing has gone from saying the Fed will cause hyperinflation to saying the Fed can't even keep inflation above 1 percent.Really? We have a central bank that cannot cause inflation?

Trade deficits have absolutely nothing to do with this. The U.S. has been running a trade deficit for decades. None of the things you mentioned have cropped up suddenly enough to account for the big decline in the labor force participation rate that began in 2008-2009. What has changed meaningfully starting around then: big government "stimulus" projects, big increases in food stamp eligibility, big extensions of unemployment benefits, big new government regulatory burdens (Obamacare), and big new increases in marginal tax rates.

PS: The good news is that hammering down employment and wages is good for earnings and dividends -- we need to see higher dividends, and if that means long-term declines in labor costs, that's fine with me -- whatever it takes...

PPS: The next wave of employment cuts needs to come from the public sector -- at least 40% of the public labor force should be eliminated -- the easiest way to accomplish these cuts would be to eliminate all non-uniformed government jobs (without exception) -- some jobs could be put back into uniforms (e.g., FBI agents and public healthcare workers), but most need to be cut as non-essential -- I would specifically include politicians who would be required to serve as volunteers -- a side benefit of only employing uniformed employees in government would be to make public employees visible in society -- public servants should wear uniforms and address the public as "sir" and mame" -- that's what public service is all about -- and again, most government jobs are non-essential regardless (and can be safely and more efficiently performed by the private sector) -- again, at least 40% of government jobs need to be eliminated as soon as possible -- the private sector is where people should want to make careers.